Supreme Court to Hear Church Plan Litigation

In Depth

On December 2, 2016, the Supreme Court of the United States granted the petitions for writs of certiorari to Advocate Health Care, et al. v. Stapleton, Maria, et al., St. Peter’s Healthcare, et al. v. Kaplan, Laurence and Dignity Health, et al. v. Rollins, Starla, all of which previously requested the Court review their arguments on whether the church plan exemption available under the Employee Retirement Income Security Act of 1974, as amended (ERISA), applies so long as a tax-qualified retirement plan is maintained by an otherwise qualifying church-affiliated organization, or whether the exemption applies only if, in addition, a church initially established the tax-qualified retirement plan. The three cases are being consolidated and will receive one hour total for oral argument.

With the district courts divided and the appellate courts reaching adverse decisions against church plan status, the three health systems above petitioned to be heard, as 30 years of reliance on administrative decisions and positions by the Internal Revenue Service (IRS), US Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC) have been left for naught given the courts of appeals decisions. Given organizations’ good-faith reliance on these prior rulings and rules of law, the uncertainty created by the litigation for faith-based organizations is diverting significant attention away from their mission and community activities while expending significant resources to defend church plan approvals previously received from governmental agencies.

There is no way to anticipate the Supreme Court’s potential take on this issue. If the Court agrees with the faith-based health systems that qualifying church-affiliated organizations can legitimately maintain and sponsor “church plans” that are exempt from ERISA, then, depending on how the decision is worded, this could bring an end to the pending cases challenging church plan status. However, given the exposure this litigation has received, any such decision in favor of the health systems will also likely be closely followed by a public push for greater scrutiny and disclosure to participants with respect to these arrangements (i.e., similar to the new notice to participant requirements set forth in Revenue Procedure 2011-44). Even with a possible win for the health systems, it is unlikely that church plans will remain “off the grid” in the future because of the administrative and legal challenges.

On the other hand, if the Supreme Court disagrees with the faith-based health systems and determines that the underlying church plans must have ultimately been established by a “church,” a much more time-consuming process will be required for these previously exempt tax-qualified retirement plans to come into ERISA compliance. Questions raised would include:

How much time will an organization be given to transition to becoming an ERISA plan?

Should the age of a particular ruling impact retroactive application (i.e., a church plan ruling which is 25 years old versus one that is five years old)?

If any adverse decision is to apply retroactively and due to application of a church plan exemption provision a benefit calculation would be impacted, are all prior in-pay benefits required to be recalculated? What if a former in-pay participant is dead?

An entire reversal of the application of the church plan exemption in this situation will raise a significant number of practical implementation issues and challenges for health systems that need to “undo” their exemption.

In sum, regardless of the ultimate decision on the issue, some level of regulatory change should be expected following any decision. The Supreme Court is expected to hear arguments in the first or second quarter of 2017, and a decision would then be released by the end of the Court’s term on June 30, 2017.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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